IF life was a scene in the Eighties show Dallas, we’d suddenly walk into the bathroom and realise that all the ’orrible stuff that has happened in recent history was just a very bad dream.

Houses would still be appreciating faster than you could say, “another buy-to-let please”. Profits in your stock portfolio would be at a level where you’d be moaning about capital gains tax and the suits that dreamt up investing in sub-prime loans would still be thought of as very clever and of course, extremely wealthy.

But we are not going to walk into the en suite and see the man from Atlantis drying himself off and Victoria Principal looking more confused than delighted.

It is alleged Mr Madoff’s ruse was to promise big returns to hedge funds and achieve them by paying out profits to established investors from the cash coming in from new investors, and so on.

And it’s not good news whether you are an investor with Mr Madoff or not. The market’s recent run, and the apparent stabilising of the banks needed another financial collapse like a hole in the head.

And here’s why. Ignoring the fact that an estimated $50bn is said to be about to be written off, the already traumatised hedge fund sector is on the brink of a sell-off which in turn will require further liquidations therefore driving asset values down and thereby forcing even more selling.

What little is left in our pensions, portfolios and equity in our homes will go south at an alarming rate.

Of the UK investors Man Group has around $360m at risk in the alleged fraud but this only represents 0.5% of its institutional funds. RBS has £400m worth of exposure, but its shares did not suffer on the news and actually put on close to 3%.

HSBC didn’t fare so well and is looking at the possibility of writing off $1bn.

Hedge fund managers have frozen withdrawals from their funds and while that looks harsh, it is in fact providing stability to the markets.

What does this all mean for the small investor? Tread carefully.

Tim Jenkins heads TJ Markets. This column is not an offer or solicitation to buy or sell securities, nor a personal recommendation. Opinions constitute judgements at the time of transmission to The Western Mail and are subject to change without warning. Full regulatory disclosures are available at tjmarkets.com